Vipshop: Will the profit decline in the second half of the year?

Below is the summary of Vipshop's first quarter financial report conference call in 2024. For the financial report analysis, please refer to " Vipshop: Under the Nest, Only the Weak Get Weaker? "

I. Review of Core Financial Information:

II. Detailed Content of the Financial Report Conference Call

2.1. Key Points from Executive Statements:

In the second quarter, sales were under pressure due to a high base and cautious customer base. The clothing category performed relatively well, with GMV from joint brands and SVIP users showing resilience throughout the quarter. Customer attraction remains high, reflecting our cautious marketing approach in the face of challenging circumstances. Active SVIP users grew by 11% year-on-year, accounting for 40% of online sales. We are enhancing the rich supply of goods, emphasizing affordability in the product range.

In business highlights, we are satisfied with the stable flow of high-quality brand inventory, thanks to the strong team procurement capabilities across categories. In the first half of the year, we selected over 600 well-known brands for the platform, including mass brands, trendy brands, and affordable luxury brands, providing a more diverse selection. Our layered approach to brand portfolio is suitable for meeting the evolving customer demands of different regions, incomes, and age groups. In the second quarter, GMV from made for VIP products grew by over 140% year-on-year. Our expertise and skills enable brand partners to customize more differentiated products at highly competitive prices, which have been well received by many customers. The repurchase rate of customized products is higher than the average for regular clothing categories, and the conditions for made for VIP are higher than the average level of the same category.

Furthermore, we continue to focus on providing value, offering customers discounted prices and quality. We continuously optimize the way we collaborate with brand partners to ensure more savings for customers. Recently, we have introduced some new channels, limited-time promotions, and daily low prices aimed at helping our customers make the most of their budgets, while also providing reliable resources for brand partners to showcase their best products. On the other hand, we are strengthening quality control. This year, we have been working on improving quality inspections and increasing quality checks throughout the entire supply chain.

Additionally, we are adjusting and improving the way we interact with customers. In the second quarter, for SVIP members, we continued to offer special online and offline discounts. We aim to deepen loyalty programs to serve their unique needs. For young users, we have customized homepage layouts and designs, created dedicated channels, and provided personalized recommendations.

In terms of topline, we continue to achieve long-term efficiency through process optimization and technological enhancements. For example, we continuously upgrade the product platform to further improve team productivity, while better serving brand partners, which motivates brand partners to invest and create better ROI. Technologically, AI is increasingly being applied to search, recommendations, and intelligent shopping assistants to provide inspiration to customers. We believe that as long as we closely connect with customers, continue to invest in procurement capabilities, and consistently execute basic discount rates, we will be prepared for long-term sustained growth.

2.1 Analyst Q&A

Q: Macro situation and consumer sentiment? GMV trend in July-August and full-year expectations?

Overall consumption is sluggish, with shopping demand becoming more cautious and refined. The situation in July-August continues, with consumer reactions similar to those in April-June. Wearable categories are growing faster than non-wearable categories, with QTD wearables slightly faster than GMV growth, while non-wearables are experiencing negative growth, mainly due to price subsidy competition. In the second half of the year, we will stabilize the wearable category and SVIP base, and strive to increase consumption among non-SVIP users, reduce the decline in standard products, and try to turn it positive.

Q: Special brand SKUs? GMV share? Are selling prices and profit margins higher?

Sales of wearable products account for over 40%, some are custom-made brands, some are brand-exclusive inventory, and there are also low-discount (below 70% off) products. We hope to have more discounts and increase differentiation to avoid malicious competition. We will continue to focus on low-priced goods and expand in this area.

Q: Has SVIP member behavior changed? Are they looking for low-priced products or reducing purchase frequency?

The SVIP base is relatively stable, with no change in the average order value of users this year, and shopping frequency has dropped slightly by 2-3 percentage points. In Q2/Q3, we will continue to increase the proportion of SVIP users and convert more non-SVIP users into SVIP users. We will curate selections for SVIP to solidify this user segment. Although the increase in SVIP users may increase the return rate, it is still worthwhile because the ARPU of SVIP users is much higher than that of non-SVIP users.

Q: Balance between investment and margin? Revenue guidance expects a 5-10% decline, indicating the company remains very cautious about investment? Margin expectations for the second half of the year?

In terms of capital allocation, we will actively acquire customers overall, but we have strict evaluation criteria for LPV. Considering the issue of breaking even, we will stop acquiring new customers to a certain extent. The macro environment is not good now, and our customer acquisition strategy has been relaxed compared to last year, but there is still a limit. This year, we will continue to look for more customer acquisition channels, including cooperation with many platforms, but we will still adhere to not investing when it exceeds our standards. Currently, we have not seen good channels for the second half of the year, and if there are good channels, costs are also controllable, so overall marketing expenses will not be too high.

Front-end GPM will remain stable, as the overall e-commerce competitive environment and brand environment are poor, with various expenses being high, such as traffic fees and return insurance. However, we will not increase related expenses, maintain a fixed price, and avoid placing a greater burden on brands. Logistics costs will increase due to a higher return rate The overall investment outlook is stable, with profits expected to remain steady in the second half of this year, slightly lower than last year.

Q: Reasons for the outflow of operating cash flow in Q2?

The decrease in net cash flow from operating activities in the second quarter was mainly due to: 1) a year-on-year decrease in revenue; 2) this year's shopping festival starting in mid-May, meaning we needed to pay suppliers for related costs and expenses in June instead of July; 3) The State Administration of Taxation advocated for the implementation of a fully digital electronic special invoice system this year, with earlier receipt of special invoices. Therefore, our payment to suppliers was faster compared to last year.

Q: Discrepancy between GMV and revenue? Increase in return rate? Has AOV increased?

The impact of return rates this year has decreased. Last year, return rates affected revenue by 3 percentage points, while this year it is 2 percentage points. Although the number of orders has decreased, the average order value of customers has not changed.

Q: Reasons for the increase in R&D expenses? Is there room for cost reduction and efficiency improvement?

Since last year, we have invested in large-scale models, including personnel, servers, and purchasing cards, which we believe are valuable for long-term development. The proportion of technology expenses is not significantly high, so we continue to invest without reducing these costs.

Q: Recently, there have been reports that e-commerce platforms have lowered their requirements for low prices in the apparel category since the middle of the year. Have you seen competitors loosening their pricing? How does this affect us?

This year, the overall environment has not been good, so all platforms are focusing on low prices and promotional activities, trying to keep prices as low as possible. This trend is expected to continue in the future. We position ourselves as a well-known brand with competitive pricing, aiming to provide high-quality products. We have cleared out many low-quality brands this year. We focus on high-quality products and brands, aiming to enhance user value. Moving forward, we will leverage the advantages of brand sales, and due to ongoing competition, we need to find ways to perform better.

Q: What is the proportion of revenue and gross profit from standard products? How many SVIP members are there currently and what is their contribution to GMV?

The gross profit from wearable products is higher than that from standard products. In terms of net profit, standard products contribute well to the company's profits due to their low return rates. Efforts will be made on standard products in the second half of the year, which will have a positive impact on profits.

As of Q2, there are 7.4 million SVIP members, with annual users ranging from 80 to 90 million. SVIP members contribute 47% of online sales.

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